OREANDA-NEWS. Fitch Ratings has affirmed Volgograd Region's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB-', Short-term foreign currency IDR at 'B' and National Long-term rating at 'A+(rus)'. The Outlooks on the Long-term ratings are Negative.

The Negative Outlook reflects Volgograd region's growing debt, decreasing expenditure flexibility and weak budgetary performance, despite pledged support from the federal government in mid-2014. The federal government's election pledges, including raising public sector salaries, will continue to fuel expenditure growth, while revenue growth will not return to pre-2012 levels due to the economic slowdown and current geopolitical situation. This will result in continued deficits being covered by more borrowing in the medium term.

Fitch expects further growth of the region's direct risk to about 60% of current revenue by end-2014, despite additional RUB4bn transfers pledged by the federal government. Volgograd region's direct risk increased to 57% of current revenue at end-2013 from 39% a year earlier. Volgograd Region's debt coverage and debt servicing ratios are at unsustainable levels due to low operating surpluses. This implies the region will have to service part of its debt with new borrowings. Fitch forecasts that the ratios will remain weak in the foreseeable future.

The region's immediate refinancing needs are 9% of direct risk maturing in 2014 and about 30% maturing in both 2015 and 2016. Overall, the administration has improved debt management by reducing its reliance on short-term bank loans in favour of medium-term bank loans and bond issuance.

Budgetary performance has remained weak since 2009 with low operating surpluses. Operating balance was a low 0.3% of operating revenue in 2013 (2012: 2.4%). Deficit before debt variation widened to 16% in 2013 from 12% in 2012. Fitch expects minor improvements in the operating balance to 2%-3% of operating revenue in 2014-2016. However, the operating balance will remain insufficient for debt servicing.

Volgograd region has an industrial economy, which provides a strong tax base but leads to high revenue volatility and concentration as top 10 taxpayers contributed 42% of total tax revenue in 2013 (2012: 47%). Gross regional product per capita was 90% of the national median in 2012.

The ratings are negatively affected by the evolving nature of the institutional framework for local and regional governments (LRGs) in Russia. It has a shorter track record of stable development than many of its international peers. The predictability of Russian LRGs' budgetary policy is constrained by the continuous reallocation of revenue and expenditure responsibilities within the government tiers.

RATING SENSITIVITIES
Growth of direct risk above 70% of current revenue or low operating balance insufficient for interest payments would lead to a downgrade.